Dividends and How do conflicts of interests impact investments?

When you invest in the stock market, which is a good thing to do to increase your wealth over time, which stock(s) you choose has some bias towards it. Where you live means you often interact with different stores which means almost every portfolio has some level of residency bias towards in it and that is ok. There are other biases in the market and as long as you are aware of them, some of them are possible to avoid. Often you have to find a reasonably independent person, such as an university professor to highlight the possible biases or conflict of interests.

In an article by George Athanassakos, a professor of finance who holds the Ben Graham Chair in Value Investing at the University of Western Ontario, wrote about conflicts of interests.

80% plus of the trading on a daily basis is institutional investors, even though many are well paid and could be rational investors, they fall into herding or what is popular? In many respects, institutional investors need to hold popular stocks similar to retail investors.

Another aspect of institutional investing is portfolio rebalancing. The issue is portfolio managers have a benchmark, index plus something, and if they do well a bonus comes along in December. To receive the bonus, they generally buy risker stocks in January and by September or October sell them, which allows for the reports on the portfolio to only have good quality stocks. Over the year this will cause some divergence which value investors can take advantage of.

If you own a stock, then an analyst(s) has written something about the stock. We all can do some of own analysis, but we also read or dependent on the views of others. Understand analyst tends to generate trading profits for their firms, which means most people want the stock to go up and recommend buys. If an analyst writes a negative story, the folks on the corporate financing team will receive no or very little business from the company when it needs financing for the business.

Rating agencies are needed, but sometimes they are part of a business which consults with the clients on raising money.

The media posts stories, depending on the source, depends on the information.

Broadly speaking, the whole stock market is a marketing machine, that just happens to sell stocks, as opposed to pills or groceries. When they want to sell stocks, they tend to write nice or positive stories.

Linking to dividend producing stocks, one of the ways to avoid many of the conflicts involved in the stock market is to buy good quality stocks and hold them. The length of time to hold them depends on their profitability to generate healthy profits to pay dividends. The business of the markets is to generate trading profits or people buying and selling. The business for you is to generate compound interest from the dividends and over time the value of the stock increases. It does not necessary mean selling, let others do that so if the company cannot generate profits you can sell into a healthy market.

There are more questions than answers, till the next time – to raising questions.


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